Tuesday, January 7, 2014

Federal Government: Mind Your Own Business! Income Inequality

The Obama administration is cleverly trying to change the subject from Obamacare to the growing income “inequality” gap. We need to stay focused on the destruction of our healthcare system but the issue of income inequality is one in which people instinctively have negative emotional reactions. These emotional reactions cling to the myth that CEO’s and the “rich” are somehow unfairly taking/making more than they deserve.

The first question I instinctively ask is this: is income supposed to be equal? Should a doctor and a garbage man make the same amount of money? Should a nurse and a janitor make the same amount of money? Should a professional athlete make so much money for playing a game? Income is determined by many factors. The first and most important is the market. What are people willing to pay for a service? Income is simply the economic principle of setting prices for labor. Like any product, pricing is set by how much it takes to produce, what people are willing to pay for the service, competition, and how the service/product is delivered in the market.

The price to deliver labor for a doctor is based on the investment that individual must make in their education and the loss of opportunity during the years spent investing in education. A doctor spends hundreds of thousands of dollars on education as well as remaining out of the labor force for eight additional years beyond most professions. The number of people willing to make this sacrifice is small which means less people compete for positions in the profession increasing the demand for their services.   A garbage man needs little education and almost anyone that can handle doing manual labor becomes available for that position. Since the skills needed are limited, the labor pool (competition) is greater, so the employer has a huge choice of candidates which means people compete heavily for the job keeping the salary down.

I often have the conversation with my wife who has been a nurse for over 25 years about why sports athlete/actors get paid so much more than a nurse or doctor. It doesn’t seem right based on the nature of the services provided but the laws of economics make it clear why the disparity in wages is justified. To sum up the reason in simple terms: The athlete/actor creates value to the team owner or movie producer worth millions of dollars. People go to watch sports or movies based on the players of the team or actors in a movie. To the employer of these people, the player and actor return millions of dollars in value so the employer can pay them more. Take into account the natural athletic ability or attractive acting skills of an actor and the people that can create that value for the employer are a limited pool.

The only way to make income equal is to force employers to pay everyone the same. The result of this mandate is counter to the laws of economics and destroys the value of work for everyone. Individuals have different skills and abilities. Jobs take different skills and educational ability. Some services/products are more valuable in the market than others. No matter what you think someone should be paid does not matter. What matters is what the market determines a wage can be.

If we continue to allow the government to attempt to make incomes more “equal” we will all be miserable and some positions and industries will simply disappear creating even more poverty. The incentive to compete for work through investments in education, developing new products, services, or companies is eliminated. Why would anyone spend the time and money if in the end we all make the same amount of money? We will all be equal in our misery, poverty, and inability to earn a “fair” wage…

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